How different types of institutions impact a country’s prosperity

Source: The post how different types of institutions impact a country’s prosperity has been created, based on the article “A Nobel for explaining why nations fail” and “ The Economics Nobel for 2024 underlines the connection between wealth of nations and democracy“ published in “The Hindu” on 16th October 2024 and in  “Indian Express” on 14th October 2024, respectively.

UPSC Syllabus Topic: GS Paper 3– Indian Economy Growth and Development

Context: The article discusses the 2024 Nobel Prize in Economics awarded to Daron Acemoglu, Simon Johnson, and James A. Robinson. They studied how different types of institutions impact a country’s prosperity. Their work shows that inclusive institutions promote growth, while extractive institutions lead to poverty.

What is the significance of the work by the 2024 Economics Nobel laureates Daron Acemoglu, Simon Johnson, and James A. Robinson?

1. The significance of their work lies in their analysis of how the quality of economic and political institutions impacts national prosperity.
2. They argue that “inclusive” institutions, which feature secure private property rights and democratic governance, foster long-term economic growth and higher living standards.
3. In contrast, “extractive” institutions, which are characterized by insecure property rights and lack of political freedom, lead to economic stagnation and poverty.
4. Their research highlights the crucial role that these institutions play in explaining the economic divergence between rich and poor countries.

How do the laureates explain the lasting economic effects of colonialism?

1. The laureates suggest that colonialism shaped the institutions that persist today.
2. In colonies where Europeans settled, inclusive institutions that promoted long-term economic growth were established.
3. In contrast, in regions where Europeans did not settle, such as India, extractive institutions were set up for short-term exploitation, resulting in long-term economic stagnation.

Why are inclusive institutions not universally adopted, according to the laureates?

1. Inclusive institutions, while beneficial for long-term growth, are often resisted by ruling elites who benefit from extractive systems.
2. If rulers can continue to extract wealth without facing rebellion, they have no incentive to implement reforms.
3. Inclusive institutions only emerge when the masses revolt or rulers see a threat to their control.

What are the implications of their findings for global economic development?

1. The implications are profound for global economic development. The laureates emphasize that the presence of inclusive institutions is crucial for sustainable economic growth.
2. They suggest that without democratic frameworks that protect individual rights and encourage economic participation, countries are unlikely to achieve significant economic advancement.
3. Their findings underscore the importance of reforming political and economic systems to create more inclusive institutions, which can lead to more equitable growth and development across nations.

How do the laureates’ theories apply to modern examples like China and Singapore?

1. While the laureates advocate for democratic institutions as ideal for economic prosperity, they acknowledge exceptions like China and Singapore.
2. China, despite its autocratic regime, has seen significant economic growth, though with notable internal inequalities.
3. Singapore, also not fully democratic, has thrived due to strong institutional frameworks.
4. These examples show that while inclusive institutions generally foster economic growth, there can be variations based on specific national contexts and policies.

Question for practice:

Discuss how the quality of economic and political institutions impacts a country’s prosperity according to the 2024 Economics Nobel laureates.